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How
to Shop for High-Tech Insurance Coverage
By
Jay Hollander
Jay Hollander, Esq. is the principal of Hollander and Company LLC, www.hollanderco.com, a New York City law firm concentrating its efforts in the protection and development of property interests relating to real property, intellectual property and commercial interests, as well as related litigation.
The content of this article is intended to provide general information relating to its subject matter. Providing it does not establish any attorney-client relationship and does not constitute legal advice. Personal advice in the context of a mutually agreed attorney-client relationship should be sought about your specific circumstances. Summary: Insurance
is important for any business, but high-tech and Internet
companies have nontraditional needs to cover claims for
such things as intellectual property infringement. This
article explains what technology companies should look
for when reviewing their insurance needs and how the buy
the right coverage.
Introduction
The market for technology companies of all kinds -- software
developers, consultants, web designers, content and service
providers, even hardware manufacturers -- has exploded over
the last several years. As with any growing enterprise, as
business explodes, so does potential liability.
Unfortunately,
until recently, innovative high-tech companies, facing
larger and more frequent intellectual-property related
liability claims for intangible damage, have been dismayed
when turning to their insurance carriers for coverage,
finding that the policies they previously obtained to protect
them were not suited to the types of claims increasingly
being made against them.While the landscape is finally
changing, many high-tech companies are unaware of the deficiencies
in their existing policies and of alternatives that are
now available to them.
Traditional Types of Coverage
So
let's first understand the customary business insurance
landscape, historically dominated by comprehensive general
liability and advertising injury policies, and, to a lesser
extent, by directors and officers' liability and professional
errors and omissions policies.Comprehensive general liability,
or CGL, policies have been around for years and traditionally
protect against unforeseen bodily injury or property
damage. The terms of such policies usually require there
to be physical injury to or, sometimes, a loss of use of,
tangible (as opposed to intellectual) property.Hence, more
intangible losses, such as economic losses due to non-functioning
software, are largely excluded from traditional coverage
under such policies. Further, due to its requirement that
calamities and losses be unforeseen, CGL coverage for intentional
claims such as misappropriation, infringement, theft of
trade secrets, etc., are foreign to such policies and have
been largely excluded, by definition.Where intangible coverage
was covered, it was usually under the "advertising injury" insurance
provisions of liability policies. This type of coverage
is, in some ways, more limited than standard coverage for
injury and property damage, but better in other ways. Unlike
the main portions of CGL coverage, which cover all unforeseen
occurrences causing the requisite physical injury or damage,
advertising injury coverage is more limited because it
is "named perils based" and provides coverage only for
enumerated "offenses."On the other hand, precisely because
advertising injury coverage is based on named or listed
offenses, there tend to be fewer exclusions from coverage.
Traditionally, the main offenses protected by such coverage
have included copyright infringement, privacy violations,
libel or slander, idea or business-style misappropriation,
and some trademark or trade dress infringement. Still,
there has been a rub here as well. First, insureds have
had to look clearly at the fine print of their policy language
to see how their particular policy named or defined the
enumerated offenses included in the advertising injury
endorsement. Second, even if listed, such coverage required
that the offense have a "nexus," or connection, with the
insured's advertising. This second requirement has been
particularly vexing for insureds since, while many types
of listed offenses can and do occur in the process of advertising,
many do not. For example, if a claim were made that an
insured's advertising infringed copyrighted materials,
advertising injury would likely come to the rescue. On
the other hand, if there was a claim for trade secret misappropriation
that lacked the required nexus to advertising, coverage
has often been denied.One of the most troublesome examples
of this latter non-qualifying type of intellectual property
claim, traditionally excluded from advertising injury coverage,
has been patent infringement claims. Why? Simply because,
as courts have often ruled, patent infringement occurs
by the use, manufacture or sale of patented inventions,
not by advertising it. Other cases, perhaps less obvious,
have continued to plague insureds who have been forced
to try to squeeze or stretch intellectual property claims
against them to provide the needed nexus to advertising
to avoid being frozen out of coverage.Thus, defendants
with insurance in patent infringement claims have argued,
with limited success, that such claims came within advertising
injury offenses dealing with theft of "style of doing business" or
copyright infringement of "slogans," rather than theft
of inventions.New
Types of Coverage
Slowly, but with
mounting speed, the insurance industry has come forward
with many products to address the lingering coverage gaps
that left more and more claims unprotected.Let's briefly
cover some of the more interesting ones.Some insurers have
initiated patent infringement liability policies, directly
addressing the problems of deliberate patent infringement.
Under
one such policy, recently offered by Intellectual Property
Risk Management (IPRM), coverage is provided:
To pay on behalf of the insured Damages and Claims Expenses
which the Insured shall become legally obligated to pay because
of the Claim or Claims first made against any Insured and
reported to the Underwriter during the Period, arising out
of the patent infringement in respect of Covered Products
by the Insured or any of its employees in the conduct of
the Insured's business.
Notice
that the policy is a claims-based policy, not an occurrence-based
policy, covering only infringement claims made and reported during
the insurance period.Even here however, insurance companies
watch their backs and don't provide complete solutions.
According to its web site, for example, IPRM's policy is
only available for the pharmaceutical, biotechnology, medical
device, vitamin and nutritional fields.For other areas
of high technology, there are other developing insurance
products.In the software arena, one available product is "Computer
Software and Services Errors or Omissions" coverage. Here,
coverage is provided for negligent acts or omissions causing
software products to malfunction or fail in their intended
purpose. Such coverage also protects against losses in
computer services, such as design and consulting services
and data processing as well as computer hardware transactions.In
seeming response to the inherent deficiencies of advertising
injury coverage to high technology situations, "Multimedia
Liability Insurance" products have also come on the market.
This type of product directly benefits content providers
and distributors, protecting them against damages from
expansively defined "multimedia activities" including "creating,
producing, distributing, exhibiting, broadcasting, advertising
or publicizing matter" The protected "matter" is, itself,
broadly defined to encompass "printed, verbal, numerical,
audio or visual expression, fixed in software or any other
medium."Like its advertising injury ancestor, Multimedia
Liability Insurance is based on specific named perils covering
the same types of intentional conduct that was the subject
of advertising injury coverage, but with one important
difference -- the nexus to advertising requirement has
been eliminated.
How to Shop for Coverage
No matter
what coverage you explore getting, there are certain
caveats that are basic to your evaluation of their adequacy.First
and foremost, the devil is in the details. Make certain
that your insurance representative carefully combines
the definitions of both the type of activity for which coverage
is available, as well as the definitions of any specifically
named offenses in policies based on named perils.Second,
pay special attention to the enumerated exclusions that
can seriously weaken the coverage you think you may be
getting.The changing nature of perils faced by high-technology
companies, combined with the growing availability of
more suitable insurance products, is creating a more generous
climate for coverage than traditionally has been available
to high-tech companies to protect them for the types
of potential losses they are increasingly facing.
Such
companies owe it to themselves to both investigate their
options and obtain the appropriate types and amounts of
coverage they require to insure their continued success
and growth. Copyright © Jay Hollander, 2007. All Rights Reserved.
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